Sunday, August 03, 2008

JERRY YANG, the soft-spoken chief executive of Yahoo, rarely becomes animated, at least in public. But ask him about his company’s lackluster performance over the past year, and he will begin to pound the table — albeit ever so lightly — punctuating his answer with a dose of impatience.

“We have a plan,” Mr. Yang said in an interview last week at Yahoo’s headquarters here. “We want to grow the business over a three- to five-year period. We are executing against that plan. And we are still doing that despite all the stuff that’s happened to us.”

All the stuff that’s happened, of course, refers to the turbulence that has engulfed Yahoo since Jan. 31, when Microsoft made an unsolicited takeover bid. At the time, conventional wisdom was that Microsoft and its hard-charging C.E.O., Steven A. Ballmer, would quickly swallow the company.

But Mr. Yang has emerged as an unlikely survivor — at least for now. He beat back Mr. Ballmer, whose offers to buy all or part of Yahoo were considered inadequate by Mr. Yang and his board. And he rebuffed Carl C. Icahn, the activist shareholder, who tried to seize control of Yahoo but settled for three seats on an expanded board.

Even so, the question remains whether Mr. Yang is the right man for the job.

Many shareholders are furious with him. With the stock trading at about $20, far below the $33 a share Microsoft offered in May, the failed merger negotiations have cost Yahoo investors nearly $20 billion. “I think they had an opportunity to get something done in the palm of their hand, and they bungled it,” said Eric Jackson following the company’s annual shareholder meeting on Friday.

Mr. Jackson is part of an individual shareholder group that collectively holds about 3.2 million Yahoo shares. On Friday, investors controlling about 15 percent of the shares represented at the meeting voted against Mr. Yang’s re-election to the board — signifying lingering concerns about his leadership.

Mr. Yang says he understands shareholders’ frustrations. But he says Yahoo was willing to sell itself at the right price and blames Microsoft for the breakdown in talks.

For now, he says he’s looking forward to giving his full attention to Yahoo and transforming it into the most popular “starting point” for Internet users. The company says it’s also developing a powerful new advertising system that can place ads on Yahoo and other sites across the Internet.

“I am more determined and more excited than ever to see those changes through,” he said.For many shareholders, the idea that Mr. Yang and his team are changing Yahoo for the better is little more than an illusion.

“These guys are just drinking their own Kool-Aid,” said Mark Nelson, a co-founder of Mithras Capital, which owns about 1.7 million Yahoo shares. “They don’t get it. They don’t understand the realities of their business.”

MR. NELSON’S comments echo the views of many shareholders and analysts who say that under Mr. Yang, a co-founder of Yahoo in 1994, the company has done little to restore its competitive position with respect to Google. They say Yahoo has been indecisive, resulting in incremental changes.

Yahoo’s results have continued to disappoint. Revenue grew 6 percent in the most recent quarter versus the same period last year, far slower than Google’s 39 percent. And Yahoo’s stock has continued a steady slide that began in January 2006 under Terry S. Semel, then the chief executive. The shares are down about 27 percent, near a four-year low, since Mr. Yang took over 13 months ago. In the same period, the Nasdaq has lost 11 percent.

It is not clear that Mr. Yang will get the time he needs to carry out his plan. Microsoft could bid anew for Yahoo or, more likely, its search business. If it does, shareholder pressure on Yahoo to do a deal is certain to be intense. And Yahoo counts Mr. Icahn, and soon, two of his allies, on its 11-member board.

Mr. Icahn did not return calls seeking comment. Writing on his blog on Thursday, he said he hoped to work with Mr. Yang to enhance value. But before he cut a deal on July 21 to join the Yahoo board, he favored both selling Yahoo’s search business to Microsoft and removing Mr. Yang.

Yahoo’s chairman, Roy Bostock, however, said the board has no plans to replace its C.E.O. “I have absolute confidence in Jerry and the management,” he said in an interview last week.At last year’s annual meeting, Mr. Semel vowed to remain in place, with the board’s backing. He stepped down a week later.

Mr. Yang’s appointment as chief executive brought hope to Yahoo employees and shareholders. Under Mr. Semel, the company had become slow and bureaucratic. It had failed to jump on Internet trends like online video and social networking. Most important, it was falling further behind Google in the lucrative online search business.

As a founder, Mr. Yang, a polite and consummate “nice guy,” was well liked inside Yahoo. An engineer with a keen vision of where the Internet was heading, he was seen upon becoming C.E.O. as having a shot at reviving a company that by many measures remains one of the most successful businesses on the Internet. With some 500 million users worldwide, Yahoo is one of the Web’s most visited sites, as well as the top Web e-mail service, and runs top-ranked news, sports and finance sites.

It remains No. 2 in search and is the largest seller of banners and other graphical ads online.Even last year, some questioned Mr. Yang’s lack of operational experience. Unlike Bill Gates, Steve Jobs and other successful tech entrepreneurs who remained at the helm of the companies they founded, Mr. Yang and the co-founder David Filo recognized early on that they didn’t have the skills to run Yahoo. They took the titles of “chief Yahoos” and hired others — Tim Koogle first, and Mr. Semel later — to run the company. Mr. Yang acted as a strategic adviser, while Mr. Filo worked on technology.

After 13 years in the wings, Mr. Yang, 39, said last year that he finally felt prepared to run Yahoo.

But critics say he has been slow to make tough and necessary choices. For instance, Yahoo pursued an advertising partnership with Google, which many investors had long recommended, only after Microsoft made its bid. And they say Mr. Yang and his team have been more focused on plotting new strategies than on carrying them out.

Shortly after taking over, Mr. Yang began a 100-day strategic review of Yahoo’s business. He promised investors that there would be “no sacred cows,” raising expectations that he would finally narrow the focus of a company that was trying to be all things to all people on the Web.He appeared to back the imperative to trim some of Yahoo’s products and services. To emphasize the point, he invited Mr. Jobs, the chief executive of Apple, to give a talk to Yahoo’s approximately 300 vice presidents last September.

Looking back at his 1996 return to Apple, Mr. Jobs spoke of his recipe for reviving it. That recipe included painful cuts — from 16 product lines to 4 — to restore financial health. Mr. Jobs also advised Yahoo executives to keep a reserve of “dry powder” to be able to seize new opportunities, as Apple eventually did with the iPod.

Many current and former Yahoo executives, who agreed to speak only on condition that they remain anonymous for fear of compromising their jobs or relationships, said Mr. Jobs’s talk was inspirational. But those executives said Mr. Yang did not follow Mr. Jobs’s prescription. The Yahoo chief charged a group of executives with identifying projects that could be cut. But when the group made its recommendations, including closing a long list of properties like OMG.com and television and education sites, Mr. Yang stalled, according to the current and former executives.

Then, in late January, he stunned Wall Street, saying that 2008 profits would be lower as Yahoo planned to invest heavily in a new display advertising system and a project to rewire the company’s technological underpinnings. Investors did not think that Yahoo had the dry powder to fire.

“They kind of shot themselves in the foot,” said Mark Mahaney, an analyst at Citigroup. “They surprised Wall Street with this major investment initiative. If they had announced it coming out of the 100-day review it would have been more tolerated.”

Mr. Yang’s announcement sent Yahoo shares down nearly 10 percent, giving Microsoft an opening. The next day, he received an urgent call. It was Mr. Ballmer, to alert him that the next morning, Microsoft would make public its bid for Yahoo.

MR. YANG dismissed the criticism, saying that he had no control over the timing of Microsoft’s actions and that the investments are necessary.

His cachet with some of his top lieutenants, meanwhile, was eroding. A series of corporate reorganizations engineered by Susan L. Decker, Yahoo’s president, created instability, leading to a long list of departures of senior staff members. Ms. Decker and Mr. Yang defend the reorganizations as necessary to make Yahoo more responsive.

Some executives still with the company say they are dismayed that two new projects, called Aikido and Judo, amount to yet another round of strategy meetings aimed at re-evaluating Yahoo’s investments in its consumer and advertising businesses.

“It kind of implies a lack of confidence in the plan that’s out there,” one senior executive said.With the fights with Mr. Icahn and Microsoft over, at least for now, some Yahoo employees say Mr. Yang has appeared more upbeat and confident.

He laughed at that observation, saying it probably says more about the mood of Yahoo than about any change in himself. Employees are more upbeat because Yahoo hit its financial projections for two quarters, despite the turmoil and a slow economy, Mr. Yang said. And Yahoo has delivered a long list of projects, he said, like improvements to its search offerings and an early version of its new advertising system.

For investors, a vital question is whether Mr. Yang’s plan to expand Yahoo can ever deliver the kind of value that Microsoft offered. Many of Yahoo’s largest shareholders wanted to sell the company to Microsoft. But they are divided over whether Yahoo or Microsoft should be blamed for the failed negotiations.

A turning point came on May 3 at a meeting in Seattle. Mr. Ballmer had just raised Microsoft’s offer to $33 a share, or $47.5 billion. Mr. Yang said the board wanted $37 a share.

The Yahoo team expected that the meeting would be the beginning of serious talks. But Mr. Ballmer said Yahoo’s counteroffer was a sign it was not interested in a deal. An hour after Mr. Yang returned to California, Mr. Ballmer called to say he was withdrawing Microsoft’s offer.Yahoo has since said it would consider a sale at around $33 a share. Microsoft has insisted it’s no longer interested. Instead, it has tried to buy Yahoo’s search business. Yahoo has said those offers were not in shareholders’ best interest.

The companies blame each other for the failure. “Right from the beginning we were open to doing a deal,” said Mr. Bostock, the Yahoo chairman. “It was simply a matter of getting the right price and getting the deal terms negotiated. They started backing off early on in the process.”Microsoft sees it differently. “Microsoft diligently pursued a proposed acquisition from the day we made our offer on Jan. 31 to the day we withdrew it on May 3,” Bradford L. Smith, Microsoft’s general counsel, said by e-mail. But Yahoo’s management and board failed to engage in meaningful negotiations for weeks, Mr. Smith added. Some shareholders are predicting — or perhaps merely hoping — that one way or another, Mr. Yang will take the fall for the failed deal.

“My belief is that if within a month or two there isn’t something transforming in the works, the major shareholders will put enough pressure on the company that he will be forced out,” said Mr. Nelson at Mithras Capital.

JERRY YANG, the soft-spoken chief executive of Yahoo, rarely becomes animated, at least in public. But ask him about his company’s lackluster performance over the past year, and he will begin to pound the table — albeit ever so lightly — punctuating his answer with a dose of impatience.

“We have a plan,” Mr. Yang said in an interview last week at Yahoo’s headquarters here. “We want to grow the business over a three- to five-year period. We are executing against that plan. And we are still doing that despite all the stuff that’s happened to us.”

All the stuff that’s happened, of course, refers to the turbulence that has engulfed Yahoo since Jan. 31, when Microsoft made an unsolicited takeover bid. At the time, conventional wisdom was that Microsoft and its hard-charging C.E.O., Steven A. Ballmer, would quickly swallow the company.

But Mr. Yang has emerged as an unlikely survivor — at least for now. He beat back Mr. Ballmer, whose offers to buy all or part of Yahoo were considered inadequate by Mr. Yang and his board. And he rebuffed Carl C. Icahn, the activist shareholder, who tried to seize control of Yahoo but settled for three seats on an expanded board.

Even so, the question remains whether Mr. Yang is the right man for the job.

Many shareholders are furious with him. With the stock trading at about $20, far below the $33 a share Microsoft offered in May, the failed merger negotiations have cost Yahoo investors nearly $20 billion. “I think they had an opportunity to get something done in the palm of their hand, and they bungled it,” said Eric Jackson following the company’s annual shareholder meeting on Friday.

Mr. Jackson is part of an individual shareholder group that collectively holds about 3.2 million Yahoo shares. On Friday, investors controlling about 15 percent of the shares represented at the meeting voted against Mr. Yang’s re-election to the board — signifying lingering concerns about his leadership.

Mr. Yang says he understands shareholders’ frustrations. But he says Yahoo was willing to sell itself at the right price and blames Microsoft for the breakdown in talks.

For now, he says he’s looking forward to giving his full attention to Yahoo and transforming it into the most popular “starting point” for Internet users. The company says it’s also developing a powerful new advertising system that can place ads on Yahoo and other sites across the Internet.

“I am more determined and more excited than ever to see those changes through,” he said.For many shareholders, the idea that Mr. Yang and his team are changing Yahoo for the better is little more than an illusion.

“These guys are just drinking their own Kool-Aid,” said Mark Nelson, a co-founder of Mithras Capital, which owns about 1.7 million Yahoo shares. “They don’t get it. They don’t understand the realities of their business.”

MR. NELSON’S comments echo the views of many shareholders and analysts who say that under Mr. Yang, a co-founder of Yahoo in 1994, the company has done little to restore its competitive position with respect to Google. They say Yahoo has been indecisive, resulting in incremental changes.

Yahoo’s results have continued to disappoint. Revenue grew 6 percent in the most recent quarter versus the same period last year, far slower than Google’s 39 percent. And Yahoo’s stock has continued a steady slide that began in January 2006 under Terry S. Semel, then the chief executive. The shares are down about 27 percent, near a four-year low, since Mr. Yang took over 13 months ago. In the same period, the Nasdaq has lost 11 percent.

It is not clear that Mr. Yang will get the time he needs to carry out his plan. Microsoft could bid anew for Yahoo or, more likely, its search business. If it does, shareholder pressure on Yahoo to do a deal is certain to be intense. And Yahoo counts Mr. Icahn, and soon, two of his allies, on its 11-member board.

Mr. Icahn did not return calls seeking comment. Writing on his blog on Thursday, he said he hoped to work with Mr. Yang to enhance value. But before he cut a deal on July 21 to join the Yahoo board, he favored both selling Yahoo’s search business to Microsoft and removing Mr. Yang.

Yahoo’s chairman, Roy Bostock, however, said the board has no plans to replace its C.E.O. “I have absolute confidence in Jerry and the management,” he said in an interview last week.At last year’s annual meeting, Mr. Semel vowed to remain in place, with the board’s backing. He stepped down a week later.

Mr. Yang’s appointment as chief executive brought hope to Yahoo employees and shareholders. Under Mr. Semel, the company had become slow and bureaucratic. It had failed to jump on Internet trends like online video and social networking. Most important, it was falling further behind Google in the lucrative online search business.

As a founder, Mr. Yang, a polite and consummate “nice guy,” was well liked inside Yahoo. An engineer with a keen vision of where the Internet was heading, he was seen upon becoming C.E.O. as having a shot at reviving a company that by many measures remains one of the most successful businesses on the Internet. With some 500 million users worldwide, Yahoo is one of the Web’s most visited sites, as well as the top Web e-mail service, and runs top-ranked news, sports and finance sites.

It remains No. 2 in search and is the largest seller of banners and other graphical ads online.Even last year, some questioned Mr. Yang’s lack of operational experience. Unlike Bill Gates, Steve Jobs and other successful tech entrepreneurs who remained at the helm of the companies they founded, Mr. Yang and the co-founder David Filo recognized early on that they didn’t have the skills to run Yahoo. They took the titles of “chief Yahoos” and hired others — Tim Koogle first, and Mr. Semel later — to run the company. Mr. Yang acted as a strategic adviser, while Mr. Filo worked on technology.

After 13 years in the wings, Mr. Yang, 39, said last year that he finally felt prepared to run Yahoo.

But critics say he has been slow to make tough and necessary choices. For instance, Yahoo pursued an advertising partnership with Google, which many investors had long recommended, only after Microsoft made its bid. And they say Mr. Yang and his team have been more focused on plotting new strategies than on carrying them out.

Shortly after taking over, Mr. Yang began a 100-day strategic review of Yahoo’s business. He promised investors that there would be “no sacred cows,” raising expectations that he would finally narrow the focus of a company that was trying to be all things to all people on the Web.He appeared to back the imperative to trim some of Yahoo’s products and services. To emphasize the point, he invited Mr. Jobs, the chief executive of Apple, to give a talk to Yahoo’s approximately 300 vice presidents last September.

Looking back at his 1996 return to Apple, Mr. Jobs spoke of his recipe for reviving it. That recipe included painful cuts — from 16 product lines to 4 — to restore financial health. Mr. Jobs also advised Yahoo executives to keep a reserve of “dry powder” to be able to seize new opportunities, as Apple eventually did with the iPod.

Many current and former Yahoo executives, who agreed to speak only on condition that they remain anonymous for fear of compromising their jobs or relationships, said Mr. Jobs’s talk was inspirational. But those executives said Mr. Yang did not follow Mr. Jobs’s prescription. The Yahoo chief charged a group of executives with identifying projects that could be cut. But when the group made its recommendations, including closing a long list of properties like OMG.com and television and education sites, Mr. Yang stalled, according to the current and former executives.

Then, in late January, he stunned Wall Street, saying that 2008 profits would be lower as Yahoo planned to invest heavily in a new display advertising system and a project to rewire the company’s technological underpinnings. Investors did not think that Yahoo had the dry powder to fire.

“They kind of shot themselves in the foot,” said Mark Mahaney, an analyst at Citigroup. “They surprised Wall Street with this major investment initiative. If they had announced it coming out of the 100-day review it would have been more tolerated.”

Mr. Yang’s announcement sent Yahoo shares down nearly 10 percent, giving Microsoft an opening. The next day, he received an urgent call. It was Mr. Ballmer, to alert him that the next morning, Microsoft would make public its bid for Yahoo.

MR. YANG dismissed the criticism, saying that he had no control over the timing of Microsoft’s actions and that the investments are necessary.

His cachet with some of his top lieutenants, meanwhile, was eroding. A series of corporate reorganizations engineered by Susan L. Decker, Yahoo’s president, created instability, leading to a long list of departures of senior staff members. Ms. Decker and Mr. Yang defend the reorganizations as necessary to make Yahoo more responsive.

Some executives still with the company say they are dismayed that two new projects, called Aikido and Judo, amount to yet another round of strategy meetings aimed at re-evaluating Yahoo’s investments in its consumer and advertising businesses.

“It kind of implies a lack of confidence in the plan that’s out there,” one senior executive said.With the fights with Mr. Icahn and Microsoft over, at least for now, some Yahoo employees say Mr. Yang has appeared more upbeat and confident.

He laughed at that observation, saying it probably says more about the mood of Yahoo than about any change in himself. Employees are more upbeat because Yahoo hit its financial projections for two quarters, despite the turmoil and a slow economy, Mr. Yang said. And Yahoo has delivered a long list of projects, he said, like improvements to its search offerings and an early version of its new advertising system.

For investors, a vital question is whether Mr. Yang’s plan to expand Yahoo can ever deliver the kind of value that Microsoft offered. Many of Yahoo’s largest shareholders wanted to sell the company to Microsoft. But they are divided over whether Yahoo or Microsoft should be blamed for the failed negotiations.

A turning point came on May 3 at a meeting in Seattle. Mr. Ballmer had just raised Microsoft’s offer to $33 a share, or $47.5 billion. Mr. Yang said the board wanted $37 a share.

The Yahoo team expected that the meeting would be the beginning of serious talks. But Mr. Ballmer said Yahoo’s counteroffer was a sign it was not interested in a deal. An hour after Mr. Yang returned to California, Mr. Ballmer called to say he was withdrawing Microsoft’s offer.Yahoo has since said it would consider a sale at around $33 a share. Microsoft has insisted it’s no longer interested. Instead, it has tried to buy Yahoo’s search business. Yahoo has said those offers were not in shareholders’ best interest.

The companies blame each other for the failure. “Right from the beginning we were open to doing a deal,” said Mr. Bostock, the Yahoo chairman. “It was simply a matter of getting the right price and getting the deal terms negotiated. They started backing off early on in the process.”Microsoft sees it differently. “Microsoft diligently pursued a proposed acquisition from the day we made our offer on Jan. 31 to the day we withdrew it on May 3,” Bradford L. Smith, Microsoft’s general counsel, said by e-mail. But Yahoo’s management and board failed to engage in meaningful negotiations for weeks, Mr. Smith added. Some shareholders are predicting — or perhaps merely hoping — that one way or another, Mr. Yang will take the fall for the failed deal.

“My belief is that if within a month or two there isn’t something transforming in the works, the major shareholders will put enough pressure on the company that he will be forced out,” said Mr. Nelson at Mithras Capital.

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